Why So Many Americans Don’t Have Bank Accounts

At a time when you can pay bills online and deposit checks remotely using a cell phone, it’s amazing how many Americans don’t have bank accounts. One in nine households is without a checking account.

And almost one-third of the population is underbanked — lacking the full range of basic financial services. Going without such services is not only inconvenient but also expensive. Someone who cashes paychecks or benefit checks at a check-cashing service and pays bills with money orders may end up spending more than $500 a year for transactions that would cost no more than $120 at banks that offer basic checking accounts.

“Life is more expensive for people who have less,” says Brian Blake, vice president of CheckSpring Bank, an institution in New York City’s South Bronx that provides banking services to low-income customers. The bank, which is changing its name to Spring Bank, is about to open a second branch in Harlem. “Even in gentrifying neighborhoods, there are lots of people earning less than $15,000 a year,” says Blake.

Not surprisingly, low-income people are the ones most likely to be underbanked, according to FDIC data. Among households with annual incomes of less than $15,000 a year, 28% have no bank account and another 22% have less than a full range of services. Rates of underbanking are similarly high among the unemployed, people without high school degrees and those under the age of 25. In addition, African Americans, Native Americans and Hispanics have higher rates than whites and Asians. Only about 5% of employed middle-class Americans are without bank accounts, but more than 20% use financial services outside the banking system — typically for reasons of convenience.

It’s one thing, of course, for relatively affluent people to pay a fee to cash a check because they are in a rush, and quite another for someone to rely on so-called alternative financial services for all of his or her transactions. Check-cashing services in New York are permitted to charge 1.91%. If someone with a $15,000 income uses them regularly to cash paychecks, that could cost up to $286 a year. Postal money orders cost $1.15 apiece, so someone using them to pay three bills a month would spend another $41 a year. Other charges — for prepaid debit cards, say — could push the total cost to more than $500 a year. And the cost of consumer borrowing outside the banking system is horrific. A 30-day auto-title loan charges interest equivalent to an annual rate of 50% to 100% or more.

Why would people be willing to incur significant costs when a basic checking account and debit card can be had for $10 a month? Moreover, it’s possible to find accounts that are free if you can maintain a minimum level of savings, make a certain number of transactions a month or arrange to be paid by direct deposit. In addition, there’s a hidden cost to doing without bank accounts: you don’t establish a banking record. Basically, people forgo these opportunities for four reasons:

Services aren’t always available. Banks typically want to attract customers who will eventually want services that are more profitable. As a result, some institutions don’t offer products for customers with limited resources. In some states, banks are required to offer a low-cost basic banking service. But they have no reason to promote it and typically encourage new customers to choose a more expensive package of services. In addition, banks may not maintain many branches in areas with lots of low-income customers.

People don’t have enough time or money. Workers who have long hours or a long commute to work may not be able to get to a branch during banking hours. If they are living paycheck to paycheck, they may not be able to wait for checks to clear. In such situations, getting immediate cash at a check-cashing service may be unavoidable.

Some people don’t trust banks. Recent immigrants may doubt the safety of banks. And many low-income people who could afford a basic account but would have a minimal balance worry that they might incur charges of $25 or more if they accidentally bounce a check or make some other error. In addition, although the use of direct deposit for paychecks makes money available more quickly and typically reduces monthly fees, some people may distrust electronic banking and prefer paper checks — or their employers may not offer direct deposit.

Potential customers lack financial literacy. The most difficult cause to quantify is whether people go outside the banking system because they don’t really understand how consumer finances work or how much nonbank alternatives charge. Each individual transaction costs relatively little, even though cumulatively they can add up to many times what a basic checking account would cost.

While these problems are most severe for low-income people, all consumers face them in one way or another. Paying an extra annual fee for a card that give you airline miles, for example, is a waste if you don’t use the card enough over the course of the year. Choosing a banking plan that requires a higher minimum balance than you can easily maintain can lead to higher monthly fees. And incurring an unnecessary ATM fee because your own bank branch is too far away and you forgot to get cash earlier isn’t really any different from using a local check-cashing service.

Some of the most common reasons many people don't have bank accounts is not mentioned. That reason being that some people on low-incomes have had bank accounts before and were serial overdrafters, or made too many transfers between savings and checking accounts, or now just have bad credit. That puts them in something called Chexsystems. Once someone is in Chexsystems, they can't open a bank account at any bank for four or five years. No one can make a bank give them an account, doesn't matter how practical it might be.

The other thing is that some merchants, vendors, bill collectors take 1-3 business days to take money out of your bank account when you pay bills online using an account. Then the banking customers with low incomes and chronically low balances think the transaction is clear when it's not and end up overdrawing their account and paying out overdraft fees. I know that particular thing makes a lot of people, even some middle class people angry. Some people feel if the money is not there the transaction should be turned down. Credit cards are turned down if they are maxed out, debit cards, and electronic transactions should be too if the money is not there. Overdrafting is a billion dollar business for bank executives.

Also, if you are one of those people that is bad at keeping track of your expenses, bad at balancing your checkbook, or arithmetic, a bank account is not for you. I don't care what this article says. Better to use cash where you can see the money leaving your hands and then when the money is gone, you have to stop spending or paying.

Lastly, many seniors are just accustomed or hard-wired to cashing their checks and getting money orders and stamps. They've been doing it for decades and might find online bill pay overwhelming and/or hard to navigate. My mother-in-law is like that.

Chase consumer fraud protection , more like false advertisement . Chase states any money removed by fraudulent action would be replaced by morning before investigation even begins. My elderly friend informed me that the bank sent him a new atm card , but he didn't receive it. Apparently it was intercepted and used to empty and overdraw the account. Not only is he out his money the bank manager statement was that protection policy only apply s to normal situations not what accoured to my friend. He also is liable for overdraft charges and other fees they are adding to his delema. What is a normal fraudulent activity , sounded like one to me . That is one example in thousands of consumer issues as to why not to have an account.

They wonder why when they charge you a fee when they use your money. Banks have FEES for this and that...Then they turn around and screw you out of your own money....Cash and only cash.. The biggest Crooks are the banks in the USA..

This article is nothing but FREE advertising for Credit cards and Banks.. you can live with out any banks or Credit Cards.

I bank with Chase in the US and am an ex-pat living in Panama. Now, Panama has NO Chase Banks there, so I am FORCED to withdraw my funds from an ATM to pay my living expenses, rent and utilities in Panama. I have to pay $8.00 total fees just to withdraw my funds up to the limit of $500 and I need to make 4 withdrawals each month to meet my living expenses and that runs me to over $32 per month ATM fees or $384 per year. You'd think, since physical access to Chase Bank is impossible in a foreign country, like Panama, you'd be given a big break in ATM withdrawal fees!!!! It's not fair to be far away from the jurisdiction of your bank and be PUNISHED for it with such high fees!!!!

@edsta212 Really? Banks are for the uneducated dinosaurs waiting to be told what to do with their money. I couldnt imagine using paper money or plastic cards for internet purchases. Seems outdated to me. I pay all my bills from my cell phone without a bank account. You have to be smarter than the bank that is raping you.

@MauriceLampl That's really dumb. Who is forcing you to use an American bank in Panama? Why not wire the money to a bank in Panama? Or have it deposited there instead of in America? I also use Chase, their closest ATM is an hour away, where I work. Sometimes I get hit with the stupid $5 charge (Chase charges $2.50, so does the ATM at the gas station) and I get pissed at myself for my poor planning, not at the bank for not offering me free use of an ATM wherever the hell on the planet I may be at any given time.

@TrajanSaldana yes that could spell disaster, getting overcharged from a utility company on an account you have autopay set up. Then most likely having to wait a few days to get the matter resolved and possibly be out of that money for the time being, causing you to be late on another bill.

@Timin203@MauriceLampl If you don't need the services of a "brick and mortar" bank, why pay the service fees of a brick and mortar bank? Try using one of the virtual banks, like ING or Scottrade etc. They charge low or no fees and everyones ATM is their ATM. You will be charge the fee but virtual banks refund all those fees at the end of the month. Your money is FDIC guaranteed just like the brick and mortar banks. The only drawback I know of is all deposits must be mailed to one far away office in some U.S. city. but this doesn't seem to be a big problem.